The Business Secretary admitted that Chancellor George Osborne had been eager to maintain the top level, but said the reduction to AA1 was “largely symbolic”.

Explaining its decision, ratings agency Moody’s pointed to “subdued” growth prospects and a “high and rising debt burden” weighing on the economy.

It now expects the “period of sluggish growth” to “extend into the second half of the decade”.

Labour branded the move a “humiliating blow” for Mr Osborne and called for higher spending to boost the economy, while there were renewed demands from the political right for tougher curbs on budgets and tax cuts.

However, the Chancellor has vowed to press ahead with his economic strategy, insisting there was no sensible alternative to the course he is pursuing.

Yesterday Mr Cable rejected the idea of slashing spending further.

Asked about the impact of the rating reduction, Mr Cable said: “It is largely symbolic.

“In terms of the real economy there is no reason why the downgrade should have any impact.

“If you remember last year the US was downgraded, the economy grew strongly relative to Europe... and France had a downgrade last year, its interest rates that it borrows long term in the markets are only a little above ours.

“These things do not necessarily affect the real economy but they reflect the fact that we are going through a very difficult time and we are trying to balance the need to get the deficit and the budget under control with the need to get back to economic growth.”

Mr Cable went on: “The rating agencies have a pretty bad record. They are a bit like tipsters. They get some things right and a lot of things not right.

“They are part of the background noise we have to take into account.”

Mr Cable said: “I think to embark on a slash-and-burn policy in response to this would be utterly foolish and counterproductive, and I am sure we will not be going there.

“What I am concentrating on in my job in government is factors that create real substantial long term growth. In other words skills training, supporting manufacturing, supporting exports, investing in science.”

Mr Cable was asked about a call from Mark Littlewood – director general of the free market Institute of Economic Affairs and a former Lib Dem press chief – for deeper public spending cuts.

“Well, he’s a right-wing ideologue,” he replied.

On the question of whether the Government could afford to spend more, the Cabinet minister said: “We have to reduce government current spending, that is what we are trying to do. But there is a lot of government spending that is investment in the future, investment in skills and science and infrastructure, and we have got to continue doing that.”

Labour deputy leader Harriet Harman said: “The trouble is that if George Osborne doesn’t understand what is going on and won’t change course, then people face more years of ’Will our kids ever be able to get a job, will they ever be able to move out of home, are we going to see our living standards falling back?’

Former Labour chancellor Alistair Darling said the Government had “sustained quite substantial political damage” and added: “They have been following the wrong economic strategy, but they are paying a very, very heavy price for it.”